An Application of Constant Market Share Analysis for the Study of Firm Profitability
AbstractWe propose a new decomposition of the return on investment (ROI) – the main accounting measure of firm profitability – to evaluate the contributions of its three components: the return on sales (ROS), the utilization (rotation) of working capital (RCC), and the utilization (rotation) of fixed capital (RCF). By using this decomposition we develop an original variant of the constant market share (CMS) analysis specifically for comparisons of firm average profitability between countries and over time. The proposed CMS methodology allows us to separate the variation of the average ROI over time (or its difference between two countries) in three components: a competitiveness effect – the difference of average ROI assuming the same reference structure for the two terms of comparison – a structure effect – the result of the difference in the internal articulation of the ROI by sector and by size structure within the two terms of comparison – and an adaptation effect, which takes into account the synergies between the two previous components. The decomposition of the ROI in the product of the three terms, ROS, RCC and RCF, plays an original role in the interpretation of the competitiveness effect. An application of the proposed methodology is carried out for the comparison of the average ROI in the industrial sector among Germany, Italy and France and over the years 2006-2008.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 25814.
Date of creation: 28 Sep 2010
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constant market share analysis; return on investment; return on sales; rotation of invested capital; comparison over time; comparison over countries;
Find related papers by JEL classification:
- C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
- L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
- L70 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - General
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- Richardson, J. David, 1971. "Constant-market-shares analysis of export growth," Journal of International Economics, Elsevier, vol. 1(2), pages 227-239, May.
- Milana, Carlo, 1988. "Constant-market-shares analysis and index number theory," European Journal of Political Economy, Elsevier, vol. 4(4), pages 453-478.
- Yuanhua Feng & Zhichao Guo & Christian Peitz & Xiangyong Tan, 2011. "A tree-form constant market share model for growth causes in international trade based on multi-level classification," Working Papers 42, University of Paderborn, CIE Center for International Economics.
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